Living off interest should be the ultimate goal of someone who wants to have a good retirement. There are so many advantages to living off interest, first; an unending supply of cash. This is a guide on how to live off interest in South Africa.
Figure out how much money you need
The first thing you should figure out is how much money you need to get to financial security and I promise you, it’s not as much as you think it is. There are 5 key things that you need to get financial security.
These are housing, utilities, food, basic transportation and insurance. Look at these 5 categories and allocate the amount of money you would need to pay for them each month if you were not working. Here is an example.
- Housing – R8k per month on rent.
- Utilities – R3k per month.
- Food – R3k per month.
- Basic transportation – R2k per month.
- Insurance – R1.5k per month.
This translates to R17 500 per month and R210k per year, this is how much you would need in order to be financially secure in your retirement. To get R210k per year all you need is R2.5million and you will get around R211k annual if you put this money in a fixed deposit with banks like African Bank.
The amount you need for financial security can be significantly reduced if you pay off your bond before going to retirement. This way; housing would not be part of this list and you need just R9 500 per month and R114k per year to have financial security.
This means you would need just around R1.5million in order to have financial security during retirement. You would live off interest by taking your principal amount and putting it in a fixed deposit that generates around 8.45% percent of interest per year.
As time goes the price of everything you put in your list will rise due to inflation and you might not manage to keep up. Especially if you spend more than 30 years in retirement; everything will surely go up and your money will lose value to inflation.
The best way to protect yourself against inflation is by putting your money in assets that protect you against inflation. Or to simply reinvest your money, knowing that you only need R1.5m to get financial security; you can invest an extra R1million and use the proceeds to reinvest so that you can offset inflation.
This way, the value of your money will not decline even though inflation goes up. You can also put some of your money in the stock market, which usually has way higher returns and you will also earn dividend income.
This was a guide on how to live off interest in South Africa. Do you have any thoughts or questions? Comment below.